It has been argued, that the time has come for India to usher in full liberalization of the capital account. Analyze.

Capital Account refers to a long-term account in the Balance of Payments Account. India currently has partial capital account convertibility. Capital Account convertibility has both positives and negatives.

Benefits of Capital Account convertibility:

  • Ease of inflow of FDIs and FPIs in India will increase investment in the economy, especially at times when National Savings have been reduced.
  • Allow Indian Investors easy access to foreign security markets.
  • Would also stop/reduce the flow of foreign investment through illicit channels.

Issues:

  • The outflow of money in crisis situations would increase. E.g – In South East Asian Economies during the 2008 global crisis.
  • This would reduce RBI’s control over the value of the rupee. It will increase the volatility of the currency.
  • Would also increase FPIs through shell companies, etc, for money laundering.

The Tarapore Committee was established by RBI to look into the issue of Capital Account Convertibility. It suggested that macro-economic indicators like inflation, fiscal deficit, and banking sector should stabilize before allowing Capital Account convertibility.

Thus, Capital Account convertibility should be allowed partially at present, meanwhile, regulations should be eased gradually. Well-calibrated steps with supervision on impacts should be the way forward.

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